Until 2014, China's retail industry has recorded substantial growth rates for a couple of years, due to rising disposable incomes and booming urbanisation. Consumer durables sales in China continued to grow in 2015, but at a slower pace than in the previous year, as government rebates on household appliances for rural families were withdrawn in 2014. In addition, the slowdown in property transactions due to the downturn in the real estate market in 2014/2015 affected consumers’ desire for new purchases of consumer appliances, especially major appliances.

A further slowdown of retail growth is expected in 2016, in line with slower economic growth and private consumption. However, gross margins in the consumer durables sector range from 20%-30%, and are expected to remain stable over the coming six months.

Some larger domestic players remain in the leading position, due to wide product portfolios in both major and small appliances, extensive distribution networks across the country, high penetration in lower tier cities and rural areas, and well-known brand reputation among local consumers. Price competition is high, especially between online and offline retail channels.

While larger retailers benefit from stable financing channels, smaller, local-focused businesses face more challenges, with many relying on non-official lending channels, even ‘shadow banking’. Many online retailers finance themselves via venture capital or private equity. Those businesses try to take advantage of a low-price strategy in order to grow quickly, and with it to attract additional investment.

On average, payments in the consumer durables retail industry take 60 days, and we expect payment delays to increase in the coming months. The consumer durables retail sector’s default/insolvency rate is relatively low compared to other Chinese industries, and we do not expect this to change. However, we need to closely monitor private-owned consumer durables retailers whose gearing is above 50%, given the concern about potential failure of loan renewal.

As e-commerce continues its rapid development in China, we also need to monitor those businesses with small-scale sales and equity but large investment in their online platforms. This could lead to significant funding pressure and, in the worst cases, to insolvency if no timely and effective action is taken.

Our underwriting stance remains generally open for the household appliances segment, as we expect sales to increase further, mainly driven by replacement demand and product upgrades. With technological upgrades to consumer appliances, products are increasingly equipped with advanced functions and therefore commanding higher prices, which will underpin value growth in coming years. While being neutral in the furniture segment, we are restrictive in the textile retail subsector due to overcapacity.